What If Your Broker Goes Bust?

If investing seems harder than it used to, you’re not imagining things. U.S. stocks are down from a decade ago, the gold/silver miners haven’t kept up with the underlying metals, and though Treasury bonds have done pretty well, only a lunatic would count on them going forward.

And now that MF Global has crashed and taken its customers’ money with it, we’re faced with the possibility that even if our stocks go up, the accounts they’re in might disappear without a trace. So yeah, it’s harder than it used to be.

On this last point, there’s clearly a market for advice on how to minimize brokerage account risk, and BullMarketThinking’s Tekoa Da Silva has has just published a report, “Bulletproof Your Shares”, that does a good job of explaining the various alternatives. The report sells for $44.95, but he’s graciously allowed DollarCollapse to post a few excerpts:

The Greatly Misunderstood MF Collapse
What most investors haven’t grasped yet, and what the mainstream media has not reported—is the fact that MF Global was not just a clearinghouse for Futures and Futures Options—it was a clearinghouse for securities as well. This means the “first domino” in the broker dealer industry has already fallen. Now the question remains—was it an isolated case? Or will there be more dominos to fall?

As reported to me by the Securities Investor Protection Corporation (SIPC), 800 MF Global account holders suffered ownership losses holding shares in their accounts. Those account holders are now being replenished by the SIPC. A second question remains: How much has been paid out, and how much does the SIPC have left in the event of another broker dealer collapse? This they could not share.

As stock investors–how are we supposed to respond and prepare if these collapses begin spreading to stock broker dealers? How would you respond if you were informed your stock broker went bankrupt—and your assets are in the hands of trustee to be split among a long line of creditors?

Many claim they’ll be protected by the SIPC, which insures stocks accounts from broker collapse up to $500k for securities, and account cash balances up to $250k. But what if you have more than $250k in cash and/or more than $500k of securities in your account? What if one of the largest broker dealers in the country went bust, bringing down thousands of accounts and depleting the entire reserves of the SIPC?

Additionally, we have yet to see the largest debtor nation in the history of the world (The United States of America) come under budget funding pressure by the bond markets. What if two major broker dealers went bust, while at the same time, the U.S. government suffers a major Treasury bond auction failure? This would result in billions of dollars of non-recoverable losses by investors, who would likely never invest in the financial markets again. Under that scenario you can forget about relying on the SIPC.

With these risks in mind—what if I were to tell you that for the cost of administrative fees, you can purchase an additional layer of “common-sense insurance” on any size stock portfolio, even on share investments worth north of $100 million? Well that’s what I’ve discovered in my research. I found there are two additional layers of preventative action you can employ starting right now to protect your shares in the event your broker dealer goes bust. These two methods are so reliable, that even if your broker lost all the cash and securities held in each and every one of its customer accounts, you’d be able to sleep safe and sound, knowing your investments would be fully protected.

Da Silva goes on to outline those extra layers of protection, their costs, paperwork requirements and set-up procedures, while answering some related questions like what to do if you lose a paper certificate and how to manage this kind of transition in a tax deferred investment account:

Q: I want to use these methods of share ownership for my stocks, but they’re stuck in a 401k or IRA—What do I do?

A: Self-directed 401ks and IRA’s are the best option. What the financial community does not tell individual investors is that self-directed retirement accounts can offer the flexibility of investing in nearly everything—from gold and silver coins, to farmland, farm tractors and oil wells. This includes shares investments using DRS and paper certification. Please see our Resources section at the end of this paper, for the names of a few companies which offer self-direction services for retirement accounts.

Well, my broker is E.F. Hutton, and E.F. Hutton says: “BUY GOLD”! (the metal, not the paper). SILVER is even better.

bob

I always stop reading when I see, “What if I were to tell you that for the cost of …….you could purchase…..”

Rachael

I’m happy to finally see the ‘investor’ class getting screwed like the rest of the poor, almost poor, and working classes of this country have been for the last 40 years. With the exception of public union terrorists, unbridled debt-based fiat has not been the average person’s friend. Hopefully now with the folks at the top of the pyramid dazed and confused as to why their efforts to secure the Federal Reserve’s Notes are starting to fail, they will quit buying elections, step out of the way, and let the people organically (no tea or other manufactured parties need apply) demand real change and revision to the mean.

http://billhopen.com billhopen

insurance is only as good as the counterparty risk, When TSHTF your insurer may go down, and you will hold a paper promise of a dead ins corp, Listen, soverign nations are going down…. the USA, the FED,are insolvent, can only print more paper to “pay” debts. hold a bag of coin in a vault as your core savings, play the market with say 25% of your capitol, understand its a gamble and may vaporize… try the insurance too but don’t DEPEND on it. As you trade, take profits out and solidify them in to tangebles and PMs and gamble on holding a few USD’s too, they may rise and allow you to buy up assets on fire sale. don’t trust digital entry accounts with all your wealth holdings— “hold” your holdings physically.

Chasman

If one considers that the above scenario were too occur, it is likely there would be a complete collapse in the global financial system. With the level of derivatives built into the system, I can not imagine that if two major brokerages go under that they all wouldn’t go under. To claim that any identity could somehow insure your investments in this scenario is extremely unlikely.

I believe we were extremely close to this point with the peak of the financial crisis of 2008. It was only when the US government came in to back all money market, back deposits, etc that this collapse was averted. Governments and the central backs will do everything in their power to not let this happen. If government were to lose control of this situation, it will go into a chain reaction, and things will get real ugly real fast. Priorities in this case will likely be food, shelter, and protection. I would also expect a visit by the gov. to demand any physical gold!

http://realestaterecord.blogspot.com/ Tyrone

I would also expect a visit by the gov. to demand any physical gold!

Demand it for what purpose? Are you anticipating a massive revaluation?
The percent held by the masses is small compared to the 8000+ tons already in their stockpile, assuming they didn’t loan it out or sell it.